One would think the commercial players wouldn't be subject to boom-bust cycles since they aren't actually going to live in their properties, and they are (or should be) well-informed. But the scent of cheap money seems to intoxicate everyone.
Yes I'm starting to see even more new/empty spaces around Stockton, Tracy, Modesto, and other Calif Central Valley towns. In Tracy 2 R/E Mortgage companies and a pizza palor were here one day gone the next. It'll be interesting to see how many small to medium banks loan on this type of property.
jo6pac
Yes, as Stag Mark's blogname so aptly declares, there's been a pervasive "illusion of prosperity". Cheap credit and exuberant companies & consumers have fueled this economy this century, and the resulting hangover will be a depression.
--
""Reckless" lenders, slowing demand and more supply coming; those are key CRE fundamentals."
When one can lend someone else's money why wouldn't one be "reckless?"
Simple workings of criminal financial gangs that are beyond the thinking ability of born-and-bred dopes. Also, CRE is a lagging to coincident indicator of the economy and yet another confirmation that the economy is already in recession.
Sure things look bad in Chicago but in my city we've got a ton of new condo projects underway and things look great! I'm sure this can't happen here. I'm mean, sure this article says its happening everywhere in residential (even Utah!), but that is different, right?
I have seen several articles (and blog entries) suggesting the anonymity of the new TAF is intended to alleviate the "stigma" of the discount window, but that does not really make sense since the discount window is already anonymous. I suspect it is the forcible injections -- against arbitrary collateral and at potentially very low interest -- that will encourage banks to tap the facility. And the more who do, the less chance of any one being singled out for derision even if the details should leak. Or something.
A builder in the area is auctioning off 240 homes this weekend. Minimum bid is $160,000 but won't sell them for that. He reserves the right to sell for what he wants. If you use his finance company, Countrywide, and you don't ultimately qualify, you get your deposit back. If you use another bank and don't ultimately qualify, you lose your auction fee (5%) and deposit. Nice deal, huh?
A lot of this space will just be tear down, because other than a Circuit City, it's not good for anything except maybe a big roller skating rink.
Fema or Hud could buy it, and use it as communal housing for the folks that can't qualify for renting. Most of those locations are so close to other businesses, they could walk to work !
CRE has a parallel with Housing: its not so much the oversupply of new structures that drives the cycle. Like housing, CRE has a pricing problem with cap rates at bubble lows. Those cap rates are a function of leverage driving down required returns. Once the leverage unwinds, so to do required returns rise -- in fact they spike, as no one will want a piece of a new structure without hefty unlevered returns.
So look for cap rates to return to trough levels, where cash returns look too good to be true. Eight percent is not impossible, which means a big decline from here.
Of course, in retail the situation is a bit different. As others note above, there will be dramatic oversupply in that market, for obvious reasons.
Am I right in thinking that, if sales are frozen, that not good for the largest commerical real estate brokers like CB Richard Ellis (ticker CBG)? If, just as in residental, volume drops before price, brokers feel the pinch before just about everyone else.
Robyn, on the other thread you asked why I think the S&P 500 will crash soon.
-- Nine recessions since 1950.
-- S&P 500 dropped an average of 18% from start of recession to trough of S&P 500 (median, 19%; range, 4-43%).
-- Average number of months from start of recession to S&P 500 trough was seven (median six, range three to 14).
I think we started our recession in October; real personal consumption expenditures fell, as did nominal commercial construction.
Using the averages from the past nine recessions: seven months from October means we'll be down 18% in April.
That's my thesis. That's why I have everything on SDS.
In the area in which I used to live (my work required me to relocate to Guam in 2006), since 2002 a huge new mall was constructed, and several existing one renovated and expanded. Keep in mind this was a stable, slow growth area. Within a 10-15 minutes drive, we had 3 Walmarts, 2 Targets, several office superstores, and 2 Home Depots. Most of this capacity was added in the past 5 years. My only questing is: what will happen to this retail space when the stores start to fold? There is no market for residential real estate now, and no need for more office/industrial? I suspect much of it will be torn down and replaced with empty lots.
. As for Guam, we are 2 years behind the US in terms of our housing bubble, fueled by foreign investors with newly resurgent currencies (Koreans, Phillipinos, etc). My new landlord bought my condo as an investment. She didn't do her math; the mortgage is higher than my rent. She wants to raise my rents 600 when the lease expires. Good luck with that: overbuilding means I have plently of relocation options.
California is so massively over retailed it isn't possible to predict the consequences.
The first signs that the retailers might be catching on are appearing. Locally, Lowes is dragging its feet on the Oxnard store ~6 miles from the Ventura location. Walmart is scaling back store expansion nationally. 'Municipal revenue enhancing adaptive reuse" is one of those planner phrases you can expect to hear a lot of over the next decade.
Conjure Bag and I disagree with you in regards to the timing of the recession, although we would probably agree that the bull market in equities is over.
As you're doubtless aware, Conjure has been saying Q1-08 for many months now. With initial jobless claims still below 350,000, we're not prepared to say that a recession has begun, even though initial claims bottomed many months ago.
We think that, at the end of November, the economy was slightly above stall speed.
Recession calls are going to be gamed. We probably entered recession in Oct but the official numbers just cannot be trusted anymore. Even if you go by the numbers I don't think they'll catch the truth of an economic contraction. Two negative quarters of GDP isn't going to catch the trillions of evaporated home equity now will it? And if inflation takes off 1-2% growth won't trigger the recession call despite reduced economic purchasing power.
Anyway, Conjure and I are going by NBER dating. We're saying that the NBER dating committee will ultimately make the call as Q1-08. They're, after all, the final arbiter.
Does anyone have any insight into the hotel market. I remember coming across an article about a year ago stating that the number of new rooms coming on line (espcially in some areas like Las Vegas) was far outstripping the increase in visitors. Now, this was during the boom times. I can't imagine things have improved since then.
Have hotels ever been anything other than money pits until you get to your 5th or 6th owner?
I think Extended Stay and the Accor chain have better site location procedures, but unless the intertubes have really helped yield management & occupancy rates, color me skeptical.
"Moody's also affirmed the triple-A rating of Ambac Financial Group Inc"
Moody's triple-A approval stamp is still operational, despite all the skeptics' howls from everywhere, including DC. They are paid-for shills and refuse to shoot straight. Wiley though. They managed to keep their options open, an attempt to shield themselves to some extent from litigation by issuing the Watch Negative on MBI.
Still, shameful, after all the blown calls over the past few years. Is anyone going to pay attention?
You have been clear and unequivocal in your call on timing - as the NBER will be when they get around to calling the recession - just wanted to punch up their timing on the call will be hugely retrospective, as always.
Isn't this what happens when you are governed by idiots?
The Democrats are not idiots, and we prospered during the Clinton years. The Republicans are just totally out of touch with reality, aside from those who are raking in the dough from the looting of the Treasury.
"Soon, you'll see lots of green space where there used to be retail. Won't that be nice for the environment?"
Doubtful. But I've seen a lot of retail repurposing over the decades. With a little work, a complex of concrete tilt-up big boxes could become light industry (or heavy), some kind of school complex, fitness center, government offices, libraries, server farms, whatever. Or any mixture of the above.
Mezzanines and free-standing second floors can be constructed inside them if needed. If I recall, HP used to have a complex in Silicon Valley that was a converted shopping mall.
I expect to see a lot of retail space mutate in interesting ways in the years to come, especially here in California. As somebody said, we're massively over-retailed here, in large part because of Prop 13 property tax restrictions; local governments have favored retail above other developments because of the sales tax revenue that they hope for.
Interesting that Buffet is involved with Tesco at this time. Maybe Zell will buy Trader Joe's. Then we will know the epoch of the corner retailer is upon us.
The Clinton administration repealed Glass Steagal and upped the RE capital gains exclusion to 250K (500K for a couple).
The above 2 actions sparked the biggest RE bubble the world's ever seen and ultimately, the mess we're in now. Coincidentally, they also helped create the wealth illusion of the Clinton era.
Detroit Dan
as long as i know the Democrats Citigroup is completely on the verge of bankruptcy while the Republican Goldman Sachs is giving generous bonuses so who are the idiots here?
just because someone has a simpleminded guy as a mascot it doesnot mean they are idiots. they just made a marketing research and know what their customers (voters) want.
so yes its like jas always says, this was not an accident this was all intentional. who knows maybe they want to cause another great depression since they know people will learn at least for generation and become prudent ok enough jokes, trying to find deeper sense makes no sense. they are simply crooks
I was hoping for more on the Roman Empire or the math genius firms who didn't realize there were other players in the game. Just please, no more politics.
It was all fraud, folks. Root cause analysis. It's a systemic disease in that the entire real estate industry is structure for racketeering. From huge, non-partisan campaign contributions to state appraisal agencies that sell licenses, but provide no oversight.
In the early 1970's, when retail was starting to follow the money from downtown to the suburbs, the White House department store in Oakland, CA closed. An electronics instrumentation company moved in with ~150 employees, and thrived for about 10 years.
I worked there mid 70's and have fond memories of a colorful "TOYLAND" sign over the Engineering Department and a functioning escalator between the Engineering and Production floors.
Who knows what will become of empty retail space this time around? But thanks for allowing me to reminisce about a memorable period in my life.
If I do any more Roman empiricism I'll be kicked to the curb. Maybe we could have another dose of Raleigh/Durham as viewed from Rodeo Drive?
Residential slowdown didn't begin here (in Sarasota) until May-June 2006, and neither average nor median pricing began to turn until February of this year. CRE is still active today - big boxes under construction or recently opened at major interstate interchanges.
A massive multi-use project is in the site-prep stage on the bayfront; the announced plan will double the city's retail and office inventory if it is completed according to spec. Irish developer with a grand vision, building into a vacuum.
And all this for a town of 100K or so population, perhaps 300K in the metro.
Of course, it was different here. I was given to understand all of Cleveland wanted to retire to this coast and, as I survey the countless beige Buick Centuries and pale, pear-shaped people in mumus and fanny packs prowling the shops and bistros of St. Armand's Key, I think perhaps the information was good.
If we do enter a recession, will everyone have to move back to Rocky River? Promise?
"There are no specific or legally mandated education requirements or academic qualifications to be on an investment committee.
Regardless of the layers of managers and manager oversight they have in place, at the end of the day the people on the investment committee are subject to the same prudent investor standards that actual managers are held to.
The Employee Retirement Income Security Act (ERISA) of 1974 makes clear that hiring managers or consultants doesn't relieve the investment committee of their fiduciary responsibility."
"The underlying collateral for Wells Fargo Asset Securities Corp. transactions consists of prime fixed and adjustable-rate mortgage loans secured primarily by one- to four-family residential properties. All of the mortgage loans were generally originated in conformity with underwriting standards of Wells Fargo Home Mortgage, Inc. (WFHM)."
Here in eastern Connecticut(Vernon), a rather derelict old strip building, with a few businesses and an empty former supermarket was gutted and renovated a year ago into room for several shops- it remains empty- with some of the windows boarded up now. This building lies on a heavily traveled road- seems like it will remain empty for the foreseeable future.
"Here in eastern Connecticut(Vernon), a rather derelict old strip building, with a few businesses and an empty former supermarket was gutted and renovated a year ago into room for several shops- it remains empty- with some of the windows boarded up now."
I've seen a lot of that around here. The new owner wants an extra buck a square foot, and the area can't support businesses that will pay that.
Heavy traffic alone past a business does not a good location make. Not unless it's the right kind of business -- something travel-related, or a real destination-type establishment with a good publicity budget. A strip of nondescript little shops is invisible at 45 miles per hour. It won't thrive without solid neighborhood patronage.
Nuke wrote : "Within a 10-15 minutes drive, we had 3 Walmarts, 2 Targets, several office superstores, and 2 Home Depots. Most of this capacity was added in the past 5 years."
What I see is a Super-Target, Lowes, Sam's Club/Walmart every 15-25 miles starting at the region's Metropolitan City center. There is not the population density to support half of this, so I wonder if the mega-store Execs were either (1) absolutely clueless dolts - thinking "build it, they'll come", or (2) engaged in a multi-year War of Attrition with each other, hoping to be the last one standing, but still, at the end, having to bulldoze much of their square-footage.
Brings to mind the great big-box closings of the '70s - anyone remember Woolco and Zayres?
OT - I just saw Greenspan whitewashing himself on 'This Week' - his best forked-tounge bit was boasting about how recession should have come a lot sooner (but wonderful low interest rates stopped it) -then warning about how trying to prevent the mkt from reaching bottom will just prolong the agony.
Here is the conclusion of the voxeu article cited by David above:
The TAF is very similar to the auctions that the ECB runs every week. With the exception of occasional daily operations, the entirety of the eurosystems reserves is injected through weekly auctions. All banks in the euro area can bid in these auctions, and the collateral accepted is quite broad. They are much more like the TAF than like the Feds normal temporary open market operations. If our diagnosis of the causes of the misbehavior of dollar LIBOR are correct and can be addressed by the TAF, then euro-LIBOR rates should look different. They do not.
Prior to the start of the crisis, the spread between one-month euro-LIBOR and the ECBs target was roughly 10 basis points, as I write this, it is 93 basis points thats bigger than the dollar-LIBOR/federal funds rate spread of 74 basis points.
Excellent description of the facility, recommended read.
Details from curious' post linking a Modesto Bee article:
On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.
But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.
[snip]
Statewide, 12,282 properties went to foreclosure auctions, but only 321 were sold to bidders. Lenders took back the rest, which had unpaid debts of nearly $4.8 billion.
Excellent article, shows how foreclosures are playing out in the bubble areas. The speculators stand on the courthouse steps and mutely give their opinion: the prices are still too high.
I know Modesto fairly well; spent a lot of time this summer, and did some shoe-leather patrols of some of the newer neighborhoods. Based on what I saw then, I'm not surprised now.
My favorite definition f an economist is that he/she is someone who believes a tree can grow to the moon as long as you give it enough money.
The discussion about the alternative uses of various commercial real estate bring that to mind. I think that there is an underlying faith in the "market" that "something" will come and find uses for this property. In a sense, after the dot-com bust housing took over. In this sense, for the past 10 years we have really been in "boom" times. With the exception of the mild recession in 2001.
The question really now is what is going to replace the housing "boom"? In a way, if we are unable to re-use these vacant commercial spaces then all of the "investment" will have been poured down the drain. In theory, all of out "investment" should have been used to create value and wealth. However, if this investment is torn down the "paper" losses become "real" losses. All of this overbuilt crap "could" be converted. However, that does not really guarantee that it can be done so profitably. What made sense at the height of the boom may not make sense now or in the near future.
The real question is what are we going to do as a country (in the macro sense) to pay the bills? we have had an exciting 10-15 years of just growth and easy money and profits. We have made huge amounts of money on the dot com boom. That was so exiting and promised that o one would ever have to work in a factory agin. we would just sell things to each other over the internet. Then our homes became the best investment in the world. Housing appreciation meant that we could just make money by selling hoe to each other
What now? Maybe we need to be concerned with all those boring industries that give us food and clothing and the basic "stuff" of life. No more "booms" just plain and simple hard work.
A whole generation has grow up thinking that money can only really be made by speculation. Seeing twenty-somethings win the dot-com lottery (ignoring the thousands of other who were not so lucky). What will happen when we tell them that they need to go to work in a factory? (even as management). What will happen when we tell them that they cannot make six figures anymore?
Thanks for the voxeu.org link. One thing he says is a little weird, though:
And, as I will discuss in a moment, non-US banks faced an added problem they could not get dollars. This was either because they could not get euros or pounds to then sell for dollars, or once they got their domestic currency they were unable to make the exchange.
...
Today we have the new problem that dollars are in short supply outside of the United States.
I have no idea what he means by this. The forex markets are the most liquid on the entire planet. If you can get Euros, you can trade them for dollars. That is not a problem and never has been. The Fed/ECB dollar swaps look like pure window dressing.
What will happen when we tell them that they need to go to work in a factory? (even as management). What will happen when we tell them that they cannot make six figures anymore?
They will not believe you. They will call you unpleasant names.
Didn't get the link right. Oh well,... a realtor talking about a Countrywide meeting. Note the bit about not evicting non-paying borrowers.
sdtfs | 12.16.07 - 11:28 am | #
Oooops, I did get the link right, but it opens in mid page.
I agree about the dollar shortage argument -- bit of a mystery as it implies FX markets are illiquid, which they are not.
In addition to the TED spread, I believe we will all start watching the spread of insured AAA on AA issuers to that of true AAA issuers. Now that the ratings agencies have formally capitulated on insurer ratings, the market will make its own determination: a widening of this spread would show that the market believes the insurers are still at risk. This may seem like a small issue, but the money markets depend on faith on ratings actions and insurer stregnth, and anything that weighs on that will cause liquidity to deteriorate further.
Bottom line: there's a chance those spreads widen after the Moody's decision, rather than contract. That would be ominous -- another sign that Toto has pulled the curtain back.
"More than one-fifth of 6,557 Bay Area properties that fell into foreclosure from January through September this year were owned by investors, according to a Chronicle analysis of public records compiled by DataQuick Information Systems. Of properties repossessed by lenders, 1 in 6 had been owned by people who had two or more foreclosures in their names. Eighteen Bay Area investors had five or more foreclosures."
Also, go to the Chronicle's front page to find related articles
There is not the population density to support half of this, so I wonder if the mega-store Execs were either (1) absolutely clueless dolts - thinking "build it, they'll come", or (2) engaged in a multi-year War of Attrition with each other, hoping to be the last one standing, but still, at the end, having to bulldoze much of their square-footage.
Chuck,
The retail chains' big mistake was wanting to be considered growth stocks by Wall Street, not value stocks. Growth gives them a higher p/e and stock price, but it can only be achieved by expanding stores by 5-10% per year, year after year. The other catalyst was the successful model created by Walgreen and a few other chains for clustering new stores close together for economies in advertising, delivery, hiring, etc. This model encouraged expansion by building as many stores as possible within a given area.
Walgreen has been adding about 600 stores for year, doubling the number of stores (to 6,000) over the past five years.
The two big drug chains, Walgreen and CVS, are vulnerable to a recession followed by national health care, which will promote cheaper Internet delivery of pharmaceuticals. They would both be good shorts.
one thing is for sure there aren't many entrepreneurs on this website. dislocation creates opportunities. opportunities are being created everywhere.
the nimble will survive and they drive the economy.
plus you gotta be optimistic about SOMETHING to be an entrepreneur even if its the future BK business or providing maintenance services to banks REO portfolios or bringing class action lawsuits to the lenders.
i'm in a better position today than i've ever been and i'm a guy that has had a hand on the ground in each of these scenarios. selling condos. taking commissions. residential building. commercial leasing. construction services.
dc1000,
I borrowed at 14.5% to get my wife's health care practice started (in '81) and never regretted it.
BUT
GeorgeNYC is right. The siren song of dot.coms was just hype for a lottery. As a "responsible adult" at several dot.coms, I managed ubernerd kids working 80 hrs/wk, mainly for lottery tickets in the form of stock options. Their moderately-good salaries could support a middle-class lifestyle for a young couple, but no more than that.
I have also been a principal in an urban infill residential building startup. That made sense on paper, but an "industrial accident" wiped out our gains.
One problem with the Sharpe ratio and other metrics of that ilk is their assumption of a "normal" probability distribution. The trouble is that many (most?) real world distributions are skewed and leptokurtic--thus, the fat tail and the black swan.
I've been a small-time entrepreneur and a conservative banker; the banker in me deserves more than half the credit for my comfortable early semi-retirement.
skewed-
my point about sharpe ratio was more just about risk/reward
a wise man once told me (paraphrased): people come to a fork in the road where the can chose security or independence. most chose security and end up losing both.
i'm in a better position today than i've ever been and i'm a guy that has had a hand on the ground in each of these scenarios. selling condos. taking commissions. residential building. commercial leasing. construction services.
While this is all easy to believe (and I do), it also underlies the root cause of the coming CRE implosion.
Because a lot of residential RE is purchased by people who "fall in love" with the place, or the neighborhood, or the school district, or just think it's time to "make the leap". 95% of house buyers would never dream of doing a rent vs. buy analysis, or even know where to start. They never compute cash flows or know their D/I ratios (unless their mortgage lender tells them).
CRE buyers, on the other hand, generally have firm targets for things like cap ratios and cash flows. And if they don't, their lenders do, and they won't get financed (at least, such is the case in more rational times). They keep balance sheets; they know what price makes a property a good deal. And for most CRE buyers (as opposed to speculators), if the price ain't right, they ain't buyin'.
Residential RE will recover (albeit fitfully) by 2010 because, as prices come down by 20-30 percent, people will finally "be able to afford" their "dream house" or that beachfront condo. Most won't know, or care, that it's still 25% more expensive than renting.
Commercial RE, on the other hand, has no hope of recovery, period, until the oversupply fades away and the cap ratios get back into line. Which IMO means a lot of buildings in the exurbs have a date with the business end of a wrecking ball sometime in the next 3-5 years.
It all works until it doesn't. Another card in the house'o'cards fluttering to the floor.
One would think the commercial players wouldn't be subject to boom-bust cycles since they aren't actually going to live in their properties, and they are (or should be) well-informed. But the scent of cheap money seems to intoxicate everyone.
Someone was actually doing 90% no interest financing? Ack? I can see that would tempt some people.
OT
Canadians Snap Up US Homes.
Canadians snap up U.S. homes - USATODAY.com
America, you are saved!!
Yes I'm starting to see even more new/empty spaces around Stockton, Tracy, Modesto, and other Calif Central Valley towns. In Tracy 2 R/E Mortgage companies and a pizza palor were here one day gone the next. It'll be interesting to see how many small to medium banks loan on this type of property.
jo6pac
Go on.
It all works until it doesn't.
Yes, as Stag Mark's blogname so aptly declares, there's been a pervasive "illusion of prosperity". Cheap credit and exuberant companies & consumers have fueled this economy this century, and the resulting hangover will be a depression.
slm share sale and margin call-
Sallie Mae Chairman Sells 90% of Shares - WSJ.com
Bloomberg - CIBC's Big Subprime Secret Might Cost Billions - A U.S. financial guarantor that faces a possible downgrade on its A credit rating...(too bad Sheila Bair doesn't regulate Canadian banks)
CIBC's Big Subprime Secret Might Cost Billions: Jonathan Weil - Bloomberg.com
Minyanville's take on CIBC's big skeleton in its vault...
What Happens If Guarantors Go Bust?-Minyanville
FFDIC-
I think that is a question all risk managers should be asking and should have done a complete evaluation of counterparty risk.
In the example you cite, my speculation would be ACA do to their being the only single A rated insurer that I am aware of.
This is the primary problem with derivatives, who is the counterpary and how large is the risk?
Hedge funds lending to hedge funds in the shadow banking system?
Wasn't it Buffet that said when the tide goes out we get to see who was swimming naked?
rc,
These days the question seems to be who isn't swimming naked.
tj-
insurance has always only been as good as the provider.
hedged is only as good as the counterparty, problem is, some of these counterparties just ain't that good.
Slightly OT,
Re: Discount window borrowing stigma. Anyone have a weblink identifying discount window borrowers? I can't find any.
I can see the bank examiners kibitzing by the water cooler now. Thanks in advance.
--
""Reckless" lenders, slowing demand and more supply coming; those are key CRE fundamentals."
When one can lend someone else's money why wouldn't one be "reckless?"
Simple workings of criminal financial gangs that are beyond the thinking ability of born-and-bred dopes. Also, CRE is a lagging to coincident indicator of the economy and yet another confirmation that the economy is already in recession.
Jas
Sure things look bad in Chicago but in my city we've got a ton of new condo projects underway and things look great! I'm sure this can't happen here. I'm mean, sure this article says its happening everywhere in residential (even Utah!), but that is different, right?
HI Clyde
Re: Discount window borrowing stigma. Anyone have a weblink identifying discount window borrowers? I can't find any.
I would like this info also but I understand it not for the little folks.
jo6pac
Clyde and jo6pac --
The discount window is already (in principle) anonymous, so the information you seek is not available.
Search for "stigma" in this article, for instance
I have seen several articles (and blog entries) suggesting the anonymity of the new TAF is intended to alleviate the "stigma" of the discount window, but that does not really make sense since the discount window is already anonymous. I suspect it is the forcible injections -- against arbitrary collateral and at potentially very low interest -- that will encourage banks to tap the facility. And the more who do, the less chance of any one being singled out for derision even if the details should leak. Or something.
If "The Loop" gets a cold then areas like Schaumburg, Arlington Heights, Hoffman Estates, Naperville catch pneumonia.
America is throwing a Stag(flation) party!
Circuit City has almost 600 super stores in the U.S.
Each superstore is 50,000 square feet.
So, when Circuit City folds in the U.S. there will be 30 million square feet of vacant retail space dumped on the market.
A lot of this space will just be tear down, because other than a Circuit City, it's not good for anything except maybe a big roller skating rink.
Soon, you'll see lots of green space where there used to be retail. Won't that be nice for the environment?
Of all sectors of CRE, retail is the most vulnerable now.
...Naperville catch pneumonia.
As long as Sullivan's survives!
A builder in the area is auctioning off 240 homes this weekend. Minimum bid is $160,000 but won't sell them for that. He reserves the right to sell for what he wants. If you use his finance company, Countrywide, and you don't ultimately qualify, you get your deposit back. If you use another bank and don't ultimately qualify, you lose your auction fee (5%) and deposit. Nice deal, huh?
A lot of this space will just be tear down, because other than a Circuit City, it's not good for anything except maybe a big roller skating rink.
Fema or Hud could buy it, and use it as communal housing for the folks that can't qualify for renting. Most of those locations are so close to other businesses, they could walk to work !
As long as Sullivan's survives!
tj & the bear | 12.15.07 - 7:12 pm | #
Hey we share something in common tj - I've eaten there! Inked a small business deal and went to Sullivans with the 'counter party'.
CRE has a parallel with Housing: its not so much the oversupply of new structures that drives the cycle. Like housing, CRE has a pricing problem with cap rates at bubble lows. Those cap rates are a function of leverage driving down required returns. Once the leverage unwinds, so to do required returns rise -- in fact they spike, as no one will want a piece of a new structure without hefty unlevered returns.
So look for cap rates to return to trough levels, where cash returns look too good to be true. Eight percent is not impossible, which means a big decline from here.
Of course, in retail the situation is a bit different. As others note above, there will be dramatic oversupply in that market, for obvious reasons.
Am I right in thinking that, if sales are frozen, that not good for the largest commerical real estate brokers like CB Richard Ellis (ticker CBG)? If, just as in residental, volume drops before price, brokers feel the pinch before just about everyone else.
Robyn, on the other thread you asked why I think the S&P 500 will crash soon.
-- Nine recessions since 1950.
-- S&P 500 dropped an average of 18% from start of recession to trough of S&P 500 (median, 19%; range, 4-43%).
-- Average number of months from start of recession to S&P 500 trough was seven (median six, range three to 14).
I think we started our recession in October; real personal consumption expenditures fell, as did nominal commercial construction.
Using the averages from the past nine recessions: seven months from October means we'll be down 18% in April.
That's my thesis. That's why I have everything on SDS.
We'll see.
this is comical, Barry doesn't want the shit, so he sell it to unsuspecting morons-
"IAC/Interactive also announced that its board approved plans to spin-off LendingTree as its own separate publicly traded company."
LendingTree Cuts 220 More Jobs
"spin-off LendingTree as its own separate publicly traded company"
Great! I hope the IPO is over-subscribed bidding the thing up to double the offer. Another short to add to my screen.
Klik here and help me to win a greek competition!!! More clicks more chances to win! You can click me one time per day... If i win i ll have 600 euros to spend for christmas. Thank you very very much!!! Kisses from Athens! Jimmy
I'll admit this took us all by suprise. No one could have seen this coming.
"I'll admit this took us all by suprise. No one could have seen this coming."
You must be a newcomer to Calculated Risk. Welcome.
Don't worry, Fitch will get around to downgrading all those CRE bonds next year, 2009 at the latest. Bwahahaha!!!
In the area in which I used to live (my work required me to relocate to Guam in 2006), since 2002 a huge new mall was constructed, and several existing one renovated and expanded. Keep in mind this was a stable, slow growth area. Within a 10-15 minutes drive, we had 3 Walmarts, 2 Targets, several office superstores, and 2 Home Depots. Most of this capacity was added in the past 5 years. My only questing is: what will happen to this retail space when the stores start to fold? There is no market for residential real estate now, and no need for more office/industrial? I suspect much of it will be torn down and replaced with empty lots.
. As for Guam, we are 2 years behind the US in terms of our housing bubble, fueled by foreign investors with newly resurgent currencies (Koreans, Phillipinos, etc). My new landlord bought my condo as an investment. She didn't do her math; the mortgage is higher than my rent. She wants to raise my rents 600 when the lease expires. Good luck with that: overbuilding means I have plently of relocation options.
California is so massively over retailed it isn't possible to predict the consequences.
The first signs that the retailers might be catching on are appearing. Locally, Lowes is dragging its feet on the Oxnard store ~6 miles from the Ventura location. Walmart is scaling back store expansion nationally. 'Municipal revenue enhancing adaptive reuse" is one of those planner phrases you can expect to hear a lot of over the next decade.
"A lot of this space will just be tear down"
A great opportunity for Family Dollar stores. To deal with inflation they could become the Family Euro stores.
jg- "I think we started our recession in October"
Conjure Bag and I disagree with you in regards to the timing of the recession, although we would probably agree that the bull market in equities is over.
As you're doubtless aware, Conjure has been saying Q1-08 for many months now. With initial jobless claims still below 350,000, we're not prepared to say that a recession has begun, even though initial claims bottomed many months ago.
We think that, at the end of November, the economy was slightly above stall speed.
Recession calls are going to be gamed. We probably entered recession in Oct but the official numbers just cannot be trusted anymore. Even if you go by the numbers I don't think they'll catch the truth of an economic contraction. Two negative quarters of GDP isn't going to catch the trillions of evaporated home equity now will it? And if inflation takes off 1-2% growth won't trigger the recession call despite reduced economic purchasing power.
Robert- "Recession calls are going to be gamed."
Well, hell yeah, but that's part of the fun, isn't it?
Anyway, Conjure and I are going by NBER dating. We're saying that the NBER dating committee will ultimately make the call as Q1-08. They're, after all, the final arbiter.
Does anyone have any insight into the hotel market. I remember coming across an article about a year ago stating that the number of new rooms coming on line (espcially in some areas like Las Vegas) was far outstripping the increase in visitors. Now, this was during the boom times. I can't imagine things have improved since then.
Have hotels ever been anything other than money pits until you get to your 5th or 6th owner?
I think Extended Stay and the Accor chain have better site location procedures, but unless the intertubes have really helped yield management & occupancy rates, color me skeptical.
Don't ruin your keyboard. Finish swallowing before reading.
Moody's Affirms Its Ratings Of Bond Insurers MBIA, Ambac - WSJ.com
Moody's also affirmed the triple-A rating of Ambac Financial Group Inc.,
"Moody's also affirmed the triple-A rating of Ambac Financial Group Inc"
Moody's triple-A approval stamp is still operational, despite all the skeptics' howls from everywhere, including DC. They are paid-for shills and refuse to shoot straight. Wiley though. They managed to keep their options open, an attempt to shield themselves to some extent from litigation by issuing the Watch Negative on MBI.
Still, shameful, after all the blown calls over the past few years. Is anyone going to pay attention?
mp,
And NBER should be making that call, say about EOY 2009?
energyecon- "And NBER should be making that call, say about EOY 2009?"
Sorry. They have their own schedule.
Conjure and I made the call many months ago in a manner we thought was unequivocal.
mp and the estimable CB,
You have been clear and unequivocal in your call on timing - as the NBER will be when they get around to calling the recession - just wanted to punch up their timing on the call will be hugely retrospective, as always.
Isn't this what happens when you are governed by idiots?
The Democrats are not idiots, and we prospered during the Clinton years. The Republicans are just totally out of touch with reality, aside from those who are raking in the dough from the looting of the Treasury.
Responses will not be read. I'm going to bed...
"Soon, you'll see lots of green space where there used to be retail. Won't that be nice for the environment?"
Doubtful. But I've seen a lot of retail repurposing over the decades. With a little work, a complex of concrete tilt-up big boxes could become light industry (or heavy), some kind of school complex, fitness center, government offices, libraries, server farms, whatever. Or any mixture of the above.
Mezzanines and free-standing second floors can be constructed inside them if needed. If I recall, HP used to have a complex in Silicon Valley that was a converted shopping mall.
I expect to see a lot of retail space mutate in interesting ways in the years to come, especially here in California. As somebody said, we're massively over-retailed here, in large part because of Prop 13 property tax restrictions; local governments have favored retail above other developments because of the sales tax revenue that they hope for.
Interesting that Buffet is involved with Tesco at this time. Maybe Zell will buy Trader Joe's. Then we will know the epoch of the corner retailer is upon us.
Detroit Dan-
Sheesh. Both parties are idiots.
The Clinton administration repealed Glass Steagal and upped the RE capital gains exclusion to 250K (500K for a couple).
The above 2 actions sparked the biggest RE bubble the world's ever seen and ultimately, the mess we're in now. Coincidentally, they also helped create the wealth illusion of the Clinton era.
I'm waiting for CB's call on the coming depression.
Detroit Dan
ok enough jokes, trying to find deeper sense makes no sense. they are simply crooks
as long as i know the Democrats Citigroup is completely on the verge of bankruptcy while the Republican Goldman Sachs is giving generous bonuses so who are the idiots here?
just because someone has a simpleminded guy as a mascot it doesnot mean they are idiots. they just made a marketing research and know what their customers (voters) want.
so yes its like jas always says, this was not an accident this was all intentional. who knows maybe they want to cause another great depression since they know people will learn at least for generation and become prudent
I was hoping for more on the Roman Empire or the math genius firms who didn't realize there were other players in the game. Just please, no more politics.
ok heres something on roman empire economy, i recommend chapter about lead
Trade Goods in the Roman Empire
It was all fraud, folks. Root cause analysis. It's a systemic disease in that the entire real estate industry is structure for racketeering. From huge, non-partisan campaign contributions to state appraisal agencies that sell licenses, but provide no oversight.
In the early 1970's, when retail was starting to follow the money from downtown to the suburbs, the White House department store in Oakland, CA closed. An electronics instrumentation company moved in with ~150 employees, and thrived for about 10 years.
I worked there mid 70's and have fond memories of a colorful "TOYLAND" sign over the Engineering Department and a functioning escalator between the Engineering and Production floors.
Who knows what will become of empty retail space this time around? But thanks for allowing me to reminisce about a memorable period in my life.
ok heres something on roman empire economy, i recommend chapter about lead
404 Not Found goods.php
Revro | 12.16.07 - 1:47 am | #
Thanks, spent the last few minutes browsing the site. I wonder if Tanta's seen it, especially the sub-forum Lingua Latina.
sdtfs,
If I do any more Roman empiricism I'll be kicked to the curb. Maybe we could have another dose of Raleigh/Durham as viewed from Rodeo Drive?
Residential slowdown didn't begin here (in Sarasota) until May-June 2006, and neither average nor median pricing began to turn until February of this year. CRE is still active today - big boxes under construction or recently opened at major interstate interchanges.
A massive multi-use project is in the site-prep stage on the bayfront; the announced plan will double the city's retail and office inventory if it is completed according to spec. Irish developer with a grand vision, building into a vacuum.
And all this for a town of 100K or so population, perhaps 300K in the metro.
Of course, it was different here. I was given to understand all of Cleveland wanted to retire to this coast and, as I survey the countless beige Buick Centuries and pale, pear-shaped people in mumus and fanny packs prowling the shops and bistros of St. Armand's Key, I think perhaps the information was good.
If we do enter a recession, will everyone have to move back to Rocky River? Promise?
"The reward you get for taking this very uncertain risk simply isn't worth it," Himes said. "
HOME - Greenwich Time
"There are no specific or legally mandated education requirements or academic qualifications to be on an investment committee.
Regardless of the layers of managers and manager oversight they have in place, at the end of the day the people on the investment committee are subject to the same prudent investor standards that actual managers are held to.
The Employee Retirement Income Security Act (ERISA) of 1974 makes clear that hiring managers or consultants doesn't relieve the investment committee of their fiduciary responsibility."
404 | MiamiHerald.com
"The underlying collateral for Wells Fargo Asset Securities Corp. transactions consists of prime fixed and adjustable-rate mortgage loans secured primarily by one- to four-family residential properties. All of the mortgage loans were generally originated in conformity with underwriting standards of Wells Fargo Home Mortgage, Inc. (WFHM)."
PR-USA.net
Bove interview-
One Analysts thinks Citi will Never Cut its Dividend - CNBC
Here in eastern Connecticut(Vernon), a rather derelict old strip building, with a few businesses and an empty former supermarket was gutted and renovated a year ago into room for several shops- it remains empty- with some of the windows boarded up now. This building lies on a heavily traveled road- seems like it will remain empty for the foreseeable future.
"Here in eastern Connecticut(Vernon), a rather derelict old strip building, with a few businesses and an empty former supermarket was gutted and renovated a year ago into room for several shops- it remains empty- with some of the windows boarded up now."
I've seen a lot of that around here. The new owner wants an extra buck a square foot, and the area can't support businesses that will pay that.
Heavy traffic alone past a business does not a good location make. Not unless it's the right kind of business -- something travel-related, or a real destination-type establishment with a good publicity budget. A strip of nondescript little shops is invisible at 45 miles per hour. It won't thrive without solid neighborhood patronage.
Wow -- great ubernerd piece on how the Fed adds liquidity to the system:
Subprime 'crisis': FAQs (revised & updated) | vox - Research-based policy analysis and commentary from leading economists
And another one on the TAF auctions:
Joint Central Banks action on subprime crisis: FAQs | vox - Research-based policy analysis and commentary from leading economists
Enjoy!
Nuke wrote : "Within a 10-15 minutes drive, we had 3 Walmarts, 2 Targets, several office superstores, and 2 Home Depots. Most of this capacity was added in the past 5 years."
What I see is a Super-Target, Lowes, Sam's Club/Walmart every 15-25 miles starting at the region's Metropolitan City center. There is not the population density to support half of this, so I wonder if the mega-store Execs were either (1) absolutely clueless dolts - thinking "build it, they'll come", or (2) engaged in a multi-year War of Attrition with each other, hoping to be the last one standing, but still, at the end, having to bulldoze much of their square-footage.
Ideas?
Bargain houses largely unsold
Courthouse-step auctions offer 1,336 properties in foreclosure -- 17 are sold
Bargain houses largely unsold - Local - Modbee.com
Brings to mind the great big-box closings of the '70s - anyone remember Woolco and Zayres?
OT - I just saw Greenspan whitewashing himself on 'This Week' - his best forked-tounge bit was boasting about how recession should have come a lot sooner (but wonderful low interest rates stopped it) -then warning about how trying to prevent the mkt from reaching bottom will just prolong the agony.
Here is the conclusion of the voxeu article cited by David above:
The TAF is very similar to the auctions that the ECB runs every week. With the exception of occasional daily operations, the entirety of the eurosystems reserves is injected through weekly auctions. All banks in the euro area can bid in these auctions, and the collateral accepted is quite broad. They are much more like the TAF than like the Feds normal temporary open market operations. If our diagnosis of the causes of the misbehavior of dollar LIBOR are correct and can be addressed by the TAF, then euro-LIBOR rates should look different. They do not.
Prior to the start of the crisis, the spread between one-month euro-LIBOR and the ECBs target was roughly 10 basis points, as I write this, it is 93 basis points thats bigger than the dollar-LIBOR/federal funds rate spread of 74 basis points.
Excellent description of the facility, recommended read.
Details from curious' post linking a Modesto Bee article:
On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.
But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.
[snip]
Statewide, 12,282 properties went to foreclosure auctions, but only 321 were sold to bidders. Lenders took back the rest, which had unpaid debts of nearly $4.8 billion.
[snip]
"Bargain houses largely unsold
Courthouse-step auctions offer 1,336 properties in foreclosure -- 17 are sold
Modbee.com | 404 152921.html"
Excellent article, shows how foreclosures are playing out in the bubble areas. The speculators stand on the courthouse steps and mutely give their opinion: the prices are still too high.
I know Modesto fairly well; spent a lot of time this summer, and did some shoe-leather patrols of some of the newer neighborhoods. Based on what I saw then, I'm not surprised now.
bubbleinfo.com » Page not found
Didn't get the link right. Oh well,... a realtor talking about a Countrywide meeting. Note the bit about not evicting non-paying borrowers.
My favorite definition f an economist is that he/she is someone who believes a tree can grow to the moon as long as you give it enough money.
The discussion about the alternative uses of various commercial real estate bring that to mind. I think that there is an underlying faith in the "market" that "something" will come and find uses for this property. In a sense, after the dot-com bust housing took over. In this sense, for the past 10 years we have really been in "boom" times. With the exception of the mild recession in 2001.
The question really now is what is going to replace the housing "boom"? In a way, if we are unable to re-use these vacant commercial spaces then all of the "investment" will have been poured down the drain. In theory, all of out "investment" should have been used to create value and wealth. However, if this investment is torn down the "paper" losses become "real" losses. All of this overbuilt crap "could" be converted. However, that does not really guarantee that it can be done so profitably. What made sense at the height of the boom may not make sense now or in the near future.
The real question is what are we going to do as a country (in the macro sense) to pay the bills? we have had an exciting 10-15 years of just growth and easy money and profits. We have made huge amounts of money on the dot com boom. That was so exiting and promised that o one would ever have to work in a factory agin. we would just sell things to each other over the internet. Then our homes became the best investment in the world. Housing appreciation meant that we could just make money by selling hoe to each other
What now? Maybe we need to be concerned with all those boring industries that give us food and clothing and the basic "stuff" of life. No more "booms" just plain and simple hard work.
A whole generation has grow up thinking that money can only really be made by speculation. Seeing twenty-somethings win the dot-com lottery (ignoring the thousands of other who were not so lucky). What will happen when we tell them that they need to go to work in a factory? (even as management). What will happen when we tell them that they cannot make six figures anymore?
David Pearson --
Thanks for the voxeu.org link. One thing he says is a little weird, though:
And, as I will discuss in a moment, non-US banks faced an added problem they could not get dollars. This was either because they could not get euros or pounds to then sell for dollars, or once they got their domestic currency they were unable to make the exchange.
...
Today we have the new problem that dollars are in short supply outside of the United States.
I have no idea what he means by this. The forex markets are the most liquid on the entire planet. If you can get Euros, you can trade them for dollars. That is not a problem and never has been. The Fed/ECB dollar swaps look like pure window dressing.
This is not just my layman's opinion; see Willem Buiter's recent piece for details.
(If you are a dedicated Fed-watcher, this one is also a must-read.)
It will be interesting to follow the TED spread following Monday's TAF auction.
What will happen when we tell them that they need to go to work in a factory? (even as management). What will happen when we tell them that they cannot make six figures anymore?
They will not believe you. They will call you unpleasant names.
http://www.bubbleinfo.com/ journa...e.html#comments
Didn't get the link right. Oh well,... a realtor talking about a Countrywide meeting. Note the bit about not evicting non-paying borrowers.
sdtfs | 12.16.07 - 11:28 am | #
Oooops, I did get the link right, but it opens in mid page.
OT: Personal finance columnist M. P. Dunleavey lost $10,000.
Personal Finance Columnist Loses $10,000 - The Consumerist
These are the stories that make me trust the MSM even less.
Nemo,
I agree about the dollar shortage argument -- bit of a mystery as it implies FX markets are illiquid, which they are not.
In addition to the TED spread, I believe we will all start watching the spread of insured AAA on AA issuers to that of true AAA issuers. Now that the ratings agencies have formally capitulated on insurer ratings, the market will make its own determination: a widening of this spread would show that the market believes the insurers are still at risk. This may seem like a small issue, but the money markets depend on faith on ratings actions and insurer stregnth, and anything that weighs on that will cause liquidity to deteriorate further.
Bottom line: there's a chance those spreads widen after the Moody's decision, rather than contract. That would be ominous -- another sign that Toto has pulled the curtain back.
From today's SF Chronicle a great article.
"More than one-fifth of 6,557 Bay Area properties that fell into foreclosure from January through September this year were owned by investors, according to a Chronicle analysis of public records compiled by DataQuick Information Systems. Of properties repossessed by lenders, 1 in 6 had been owned by people who had two or more foreclosures in their names. Eighteen Bay Area investors had five or more foreclosures."
Also, go to the Chronicle's front page
to find related articles
CR, congrats (I think) on the mention in the NY times today.
I did a post on the retail space vacancies in Elk Grove, CA (southern Sacramento County). I think this is pretty representative of the area:
An Elk Grove Commercial Real Estate Photolog
Chuck,
The retail chains' big mistake was wanting to be considered growth stocks by Wall Street, not value stocks. Growth gives them a higher p/e and stock price, but it can only be achieved by expanding stores by 5-10% per year, year after year. The other catalyst was the successful model created by Walgreen and a few other chains for clustering new stores close together for economies in advertising, delivery, hiring, etc. This model encouraged expansion by building as many stores as possible within a given area.
Walgreen has been adding about 600 stores for year, doubling the number of stores (to 6,000) over the past five years.
The two big drug chains, Walgreen and CVS, are vulnerable to a recession followed by national health care, which will promote cheaper Internet delivery of pharmaceuticals. They would both be good shorts.
one thing is for sure there aren't many entrepreneurs on this website. dislocation creates opportunities. opportunities are being created everywhere.
the nimble will survive and they drive the economy.
plus you gotta be optimistic about SOMETHING to be an entrepreneur even if its the future BK business or providing maintenance services to banks REO portfolios or bringing class action lawsuits to the lenders.
i'm in a better position today than i've ever been and i'm a guy that has had a hand on the ground in each of these scenarios. selling condos. taking commissions. residential building. commercial leasing. construction services.
sharpe ratios people.
sure beats working for a living.
dc1000,
I borrowed at 14.5% to get my wife's health care practice started (in '81) and never regretted it.
BUT
GeorgeNYC is right. The siren song of dot.coms was just hype for a lottery. As a "responsible adult" at several dot.coms, I managed ubernerd kids working 80 hrs/wk, mainly for lottery tickets in the form of stock options. Their moderately-good salaries could support a middle-class lifestyle for a young couple, but no more than that.
I have also been a principal in an urban infill residential building startup. That made sense on paper, but an "industrial accident" wiped out our gains.
One problem with the Sharpe ratio and other metrics of that ilk is their assumption of a "normal" probability distribution. The trouble is that many (most?) real world distributions are skewed and leptokurtic--thus, the fat tail and the black swan.
I've been a small-time entrepreneur and a conservative banker; the banker in me deserves more than half the credit for my comfortable early semi-retirement.
skewed-
my point about sharpe ratio was more just about risk/reward
a wise man once told me (paraphrased): people come to a fork in the road where the can chose security or independence. most chose security and end up losing both.
i'm in a better position today than i've ever been and i'm a guy that has had a hand on the ground in each of these scenarios. selling condos. taking commissions. residential building. commercial leasing. construction services.
While this is all easy to believe (and I do), it also underlies the root cause of the coming CRE implosion.
Because a lot of residential RE is purchased by people who "fall in love" with the place, or the neighborhood, or the school district, or just think it's time to "make the leap". 95% of house buyers would never dream of doing a rent vs. buy analysis, or even know where to start. They never compute cash flows or know their D/I ratios (unless their mortgage lender tells them).
CRE buyers, on the other hand, generally have firm targets for things like cap ratios and cash flows. And if they don't, their lenders do, and they won't get financed (at least, such is the case in more rational times). They keep balance sheets; they know what price makes a property a good deal. And for most CRE buyers (as opposed to speculators), if the price ain't right, they ain't buyin'.
Residential RE will recover (albeit fitfully) by 2010 because, as prices come down by 20-30 percent, people will finally "be able to afford" their "dream house" or that beachfront condo. Most won't know, or care, that it's still 25% more expensive than renting.
Commercial RE, on the other hand, has no hope of recovery, period, until the oversupply fades away and the cap ratios get back into line. Which IMO means a lot of buildings in the exurbs have a date with the business end of a wrecking ball sometime in the next 3-5 years.